Discounts and Underwriting Fees Associated with A-REIT Rights Issues

1
Discounts and Underwriting Fees Associated with
A-REIT Rights Issues

• Bill Dimovski
• Deakin University
• Australia

2
What are Rights Issues?

• Renounceable
• Non-Renounceable

3
So how important is Australia?

• WFE ranks ASX as 11th largest in world
• Third largest in raising IPO and SEO capital in
  2009
• Raised over 11 of SEO capital raised by 52
  member exchanges
• A-entities raised A60 billion in equity capital
  in 2008 (A-REITs raised nearly 10 billion in
  2008 and 2009)

4
So how important are A-REITs?

• Own over A200 billion in assets
• 6 of the ASX
• 14 of the global REIT cap
• Major institutions and pension funds are
  investors (Westfield - institutions own 66)
• Raised over A20 billion by rights issue during
  2001-9 (3 times that raised by IPO during the
  same period.

5
Past Literature

• Underwriting costs as of proceeds SEO or
  rights offerings not REITs
• Smith (1977), US 71-75, 3.6
• Lee et al (1996) US 90-94, 5.44
• Corwin (2003) US 80-98, 5.32
• Armitage (2000), UK 85-96 1.53
• Martin-Ugedo (2003), Spain 89-97 2.0
• Discount
• Balachandran et al. (2008), Australia 95-05
  around 18, Owen and Suchard (2008), Australia
  93-01, around 19.
• Armitage (2000) UK 21
• Smith (1977) US 8

6
Past Literature

• Some Influencing factors
• Underwriting costs
• Economies of scale (Armitage, 2000 Smith, 1977)
  proceeds, v UC
• Percentage underwritten (Martin-Ugedo, 2003)
  perc uwritten, UC
• Ownership concentration (Hansen and Pinkerton,
  1982) , v UC
• Issuer risk Std dev last 250 days - , UC
• Discount , v UC
• Discount
• Issuer risk , v Disc
• Proceeds/Mkt cap , v Disc
• Volume (ave last 250 days) , v Disc
• Underwriter status
• Ratio of new for existing , v Disc

7
Aim

• This paper investigates factors that might
  influence these substantial costs
• Underwriter costs and
• Discounts
• Of A-REIT rights issues during Jan 2001-June 2009

8
Data

• The sample period is from 2001-June 2009
• The databases used are FinAnalysis and SNL which
  allow data to be downloaded from ASX
• Over A20 billion raised
• 62 observations, 58 underwritten, 8 offered
  renounceable rights, nearly 4.5 in 10 use stapled
  securities.

9
Summary Stats

• Ave discount 9.5 (median 7.7)
• Ave Ufees 2.9 (median 2.8)
• Ave proceeds - A354m
• Ave held by top 20 s/holders 64
• Ave uwritten 93
• Ave std dev daily returns 2.5
• Ave new to existing ratio 0.458 for 1 (nearly 12)

10
Model

• PercUfee

11
Model

• Discount

12
Results

• UFEE results
• Higher risk, higher underwriting costs
  (Armitage 2000 and others)
• Not seeing larger capital raisings, lower
  underwriting costseconomies of scale perhaps
  these issues are just so big anyway
• DISCOUNT results
• Higher issuer risk larger discounts (Armitage
  2000 and others)
• 2008 and 2009 larger discounts